New definition of Small and Medium companies in Accounting Standard

The ministry of corporate affairs (MCA) has notified The Companies (Accounting Standards) Amendment, Rules 2021 on 23^rd June 2021. These Rules came into effect from 23^rd June 2021.

The MCA has raised the threshold turnover and borrowing limits in its new definition of small and medium companies (SMCs) to align the applicable accounting standards rules with the latest definition as per the ministry of micro, small & medium enterprises.

New Definition:

“Small and Medium Sized Company” (SMC) means, a company-

1. whose equity or debt securities are not listed or are not in the process of listing on any stock exchange, whether in India or outside India;
2. which is not a bank, financial institution or an insurance company;
3. whose turnover (excluding other income) does not exceed Rs. 250 crore in the immediately preceding accounting year;
4. which does not have borrowings (including public deposits) in excess of Rs. 50 crore at any time during the immediately preceding accounting year; and
5. which is not a holding or subsidiary company of a company which is not a small and medium-sized company.

Explanation- For the purposes of this clause, a company shall qualify as a Small and Medium Sized Company, if the conditions mentioned therein are satisfied as at the end of the relevant accounting period.

Old Definition:

Small and Medium-Sized Company (SMC) as defined in Clause 2(f) of the Companies (Accounting Standards) Rules, 2006: (f) “Small and Medium Sized Company” (SMC) means, a company-

1. whose equity or debt securities are not listed or are not in the process of listing on any stock exchange, whether in India or outside India;
2. which is not a bank, financial institution or an insurance company;
3. whose turnover (excluding other income) does not exceed Rs. 50 crore in the immediately preceding accounting year;
4. which does not have borrowings (including public deposits) in excess of Rs. 10 crore at any time during the immediately preceding accounting year; and
5. which is not a holding or subsidiary company of a company which is not a small and medium-sized company.

Explanation: For the purposes of clause (f), a company shall qualify as a Small and Medium Sized Company, if the conditions mentioned therein are satisfied as at the end of the relevant accounting period.

Benefits of New Definition:

a. Less complexity in application of Accounting Standard in terms of the number of required disclosures

b. To promote ease of doing business.

Applicability of New Definition:

The notification also says that an existing company which was not a small and medium company previously but became so subsequently would not be able to avail of any exemptions in accounting standards.

“It can avail of these exemptions if it continues as a small and medium company for two consecutive accounting periods.”